Most people think about homeowners' taxes on a primary residence when someone mentions a property tax deduction. But there's more to it than that.
State and local governments impose taxes on different types of properties. The IRS allows you to deduct many of these on your tax return, but there are new rules and restrictions on the maximum amount.
Let's take a look at the taxes that you might be missing. They might be deductible for you.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act changed the regulations regarding property tax deductions when it went into effect in 2018. The TCJA put a cap on the deductions for state and local taxes.
The total amount that you can deduct for state and local taxes, including property taxes, is $10,000 ($5,000 if married filing separately) for the 2021 tax year, the return you'll file in 2022. There was no limit on the amount that you could deduct for real estate property taxes prior to the TCJA. If you paid $5,000 in property taxes, you got to deduct $5,000. If you paid $30,000 in property taxes, you deducted $30,000. But that's not the case any longer, at least until the TCJA expires at the end of 2025.
This change hit taxpayers especially hard in states with high property taxes. Homeowners in these high property tax states often had taxes well in excess of $10,000 and they've lost the ability to deduct any more than that.
You can deduct your property taxes plus your state income taxes and state sales tax by itemizing your tax deductions on Schedule A. The $10,000 cap applies to the total amount, not just property taxes alone.
You're not allowed to deduct both your state income taxes and sales tax. You must choose one or the other.
Deductible Property Taxes
To qualify as a tax deduction, real estate taxes must be:
- Used for community or government purposes
- Uniformly levied across the community
- Based on the property’s value, known as ad valorem taxes
- Assessed by the end of each tax year
If the property meets these qualifications, the IRS allows you to deduct the taxes on the following types of properties:
- Primary home
- Second homes
- Co-op apartments
- Cars, RVs and other vehicles
- Taxes on repair and maintenance of sidewalks, streets or water and sewage systems
Non-Deductible Property Taxes
The following taxes are not deductible:
- Unpaid property taxes
- Assessments for water and sewer systems, sidewalks or streets
- Any portion of property tax designated for services
- Transfer taxes on the sale of house
- Assessments from a homeowners association unless the invoice from the HOA details the payment of any property taxes, making this portion deductible.
How to Claim a Property Tax Deduction
You must itemize your deductions to claim a property tax deduction. You can't claim the standard deduction and claim a property tax deduction, too. Itemizing versus claiming the standard deduction is an either/or decision. You can't do both.
Itemizing your personal tax deductions on your Form 1040 tax return along with Schedule A can make sense if the total of your itemized deductions exceeds the standard deduction you're entitled to claim based on your filing status. The standard deductions are $12,550 for single taxpayers, $18,800 for those who can claim the head of household status, and $25,100 for married taxpayers who file jointly as of the 2021 tax year.
Taxpayers in states with high real estate property taxes, such as New York, New Jersey and California, will easily reach the $10,000 TCJA cap and they'll also likely have high mortgage interest deductions. The itemized deductions for these taxpayers may exceed their standard deduction. But taxpayers in states with low real estate property taxes will probably be better off claiming the standard deduction instead because it amounts to more.
You might want to complete Schedule A to pin down the total of your itemized deductions so you can elect to use whichever option takes more off your taxable income and saves you the most in tax dollars.
Read More: What Are Property Taxes?
How to Pay Real Estate Property Taxes
People usually pay their property taxes in one of two ways. They pay by check once or twice a year after receiving a bill, or the money is included with their monthly mortgage payments and set aside each month in an escrow account. The lender pays the taxes to the local government out of the escrow account.
Property taxes are deductible in the year they're paid if you're paying by check. Payments made from mortgage escrow accounts are deductible in the year they're paid, not when they're included in your monthly mortgage payment. The mortgage payment you make in July 2021 might include a sum toward your property taxes, but you'll have a 2022 tax deduction, not one for 2021, if your lender escrows that amount and doesn't actually send it to the taxing authority until January 2022.
Your mortgage lender should send you a Form 1098 by Jan. 31 after the close of the tax year with information about payment of mortgage interest and property taxes.
Taxes on a Second Home
You can deduct the mortgage interest and real estate taxes on your Schedule A just as you would with your primary residence if you personally use a second home for more than 14 days a year, or more than 10 percent of the number of days that the property is rented out. These qualifications would apply even if you allow members of your family – such as siblings, parents and grandparents – to use your second home and you don't charge them rent.
Personal Property Taxes
The IRS also allows you to deduct taxes on certain personal property, such as cars and boats. These taxes must meet certain conditions to qualify. They must be:
- Levied on personal property
- Based on the value of the property
- Imposed annually
Some states base their vehicle registration fees on the value of the property, at least to some extent. The portion of the fee that's based on the property’s value can be deducted as a personal property tax expense on Schedule A.
Property Taxes on Business Property
Property tax on equipment used in your trade or business can be deducted as a business expense. Sole proprietors would deduct these taxes on Schedule C, Profit or Loss From Business, and file the schedule with Form 1040. Only the percentage associated with the amount of time this property is used for business can be deducted as a business expense if the property is used for both business and personal reasons.
You'll generally be able to use Schedule A to deduct the mortgage interest and property taxes on your tax return if you own a primary residence and are paying on a mortgage. It can pay to look into whether you have other itemized deductions you can claim that will push you over the amount of the standard deduction you're entitled to.
- Intuit TurboTax: Claiming Property Taxes on Your Tax Return
- Internal Revenue Service: Schedule A
- Internal Revenue Service: Schedule E
- Internal Revenue Service: Renting Residential and Vacation Property
- Intuit TurboTax: Buying a Second Home—Tax Tips for Homeowners
- Tax Policy Center: How Did the TCJA Change the Standard Deduction and Itemized Deductions?
- Internal Revenue Service: Topic No. 503 Deductible Taxes
- Internal Revenue Service: IRS Provides Tax Inflation Adjustments for Tax Year 2021
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.